Missouri Supreme Court Rules on Bad Faith Refusal to Settle Case

In the case of Scottsdale Insurance Company and Wells Trucking v. Addison Insurance Company and United Fire and Casualty Company the Missouri Supreme Court en banc analyzed the question of whether an excess insurer who pays a third-party claim on behalf of its insured after a primary insurer refused, allegedly in bad faith to settle the claim has a right to obtain the amount paid from the primary insurer.

In the underlying case, Wells Trucking (“Wells”) had a primary insurance policy with United Fire that had a liability limit of $1,000,000 and also an excess policy with Scottsdale with liability limits of $2,000,000.  The Scottsdale policy specified that it would not apply until and unless the underlying policy was exhausted.  The Scottsdale policy also provided that if Wells had any rights to recover any payment Scottsdale made under the policy, those rights would be transferred to Scottsdale.  

In 2007 a Wells employee was operating a truck pulling a flatbed trailer when he was involved in an auto accident that resulted in the death of another motorist.  The deceased driver of the automobile was survived by his wife and two children who entered into negotiations with United Fire to settle any claims the decedent’s family might have against Wells and the employee involved in the accident.  Eventually, the decedent’s family filed a wrongful death lawsuit against Wells and the employee while settlement negotiations continued.  Thereafter, United Fire, Scottsdale and the decedent’s family participated in mediation which resulted in United Fire and Scottsdale each tendering $1,000,000 to settle the case for a total of $2,000,000.  Wells then assigned to Scottsdale its right to pursue a bad faith refusal to settle claim against United Fire and agreed to pursue a bad faith failure to settle claim for the benefit of Scottsdale.

Wells and Scottsdale filed suit against United Fire for bad faith refusal to settle.  In support of their claims that United Fire had refused in bad faith to settle the wrongful death action, Wells and Scottsdale made many allegations against United Fire.  Those included allegations that the decedent’s family withdrew a $1,000,000 settlement demand raising it to $3,000,000 and refusing to accept $1,000,000 in settlement after United Fire allegedly refused to settle the wrongful death claim on more than one occasion within United Fire’s coverage limit.  The decedent’s family proposed to United Fire that if United Fire agreed to tender its $1,000,000 limits toward the $3,000,000 demand, they would negotiate with Scottsdale over payment of the additional $2,000,000.  The allegation was that only then did United Fire agree to tender its limits of $1,000,000 toward a settlement which settlement could no longer be achieved within $1,000,000 limits.  Additional allegations were that at the time it finally agreed to tender its $1,000,000 limits, United Fire knew that amount was not sufficient to settle the lawsuit, and that Wells and/or Scottsdale would have to contribute additional sums to settle the lawsuit or face exposure to a probable judgment in excess of $1,000,000.

Ultimately, United Fire filed a motion for summary judgment on all counts in the Wells’ and Scottsdale’s petition.  Thereafter, the trial court entered an interlocutory order finding that Wells’ and Scottsdale’s response to United Fire’s summary judgment motion was untimely. 

The trial court further found that the elements of a bad faith refusal to settle claim could not be met by Wells or Scottsdale because “United Fire did not refuse in bad faith or otherwise to settle the claim within the liability limits of the policy” and also because “Wells Trucking was not subjected to a judgment in excess of the policy limits.”  The court also found that there is no duty of good faith between a primary and secondary insurer and that Missouri law does not permit the assignment of an insured’s bad faith refusal to settle claim and that Missouri law does not permit an excess insurer to bring an action for bad faith refusal to settle based on equitable or conventional subrogation.

Wells and Scottsdale appealed that order, and following an opinion by the Court of Appeals, the case was transferred to the Missouri Supreme Court.

The Missouri Supreme Court dealt with a procedural question under Rule 44.04 regarding an extension of time and determined that the trial court did not abuse its discretion in not treating Wells’ and Scottsdale’s motion for reconsideration as a motion requesting an extension of time to file a response to United Fire’s summary judgment motion.  Nevertheless, the court determined that United Fire bore the burden of showing that it was entitled to summary judgment.  In its motion for summary judgment, United Fire had asserted that Wells and Scottsdale could not prove a bad faith refusal to settle claim because the essential elements of the claim were not met.  In citing Missouri case law going back to 1950 in the Zumwalt v. Utilities Insurance Company, the Supreme Court stated that a bad faith refusal to settle an action will lie when a liability insurer reserves the exclusive right to contest or settle any claim, prohibits the insured from voluntarily assuming any liability or settling any claims without consent, and is guilty of fraud or bad faith in refusing to settle a claim within the limits of the policy.  Also citing to Zumwalt, the Missouri Supreme Court reiterated that bad faith can be described as “the intentional disregard of the financial interest of the insured in the hope of escaping the responsibility imposed upon the insurer by its policy.”  The Supreme Court affirmed that the insurance company’s duty is to protect the insureds’ financial interests which are impacted by an insurer’s breach of duty whether the breach results in an excess judgment or an excess settlement.  The court stated that an insurer’s obligation to act in good faith when settling a third-party claim is part of what the insured pays for with its insurance premiums.  Further, an insurer may be liable over and above its policy limits if it acts in bad faith in refusing to settle the claim of its insured within its policy limits when it has a chance to do so.  In the underlying case, United Fire allegedly had more than one opportunity to settle within its policy limits.  The Supreme Court also determined that a bad faith refusal to settle an action falls within the category of assignable torts.  Scottsdale’s policy with Wells contained a provision granting Scottsdale a right to subrogate payments Scottsdale made under the policy.  Because Scottsdale paid $1,000,000 towards the settlement of the wrongful death claim under the policy, the court determined that it has a right under the policy to recover that amount through Wells and therefore is able to invoke the doctrine of conventional subrogation.  The court also answered the question on equitable subrogation by stating that the right to equitable subrogation belongs to one not a volunteer, who pays another’s debt to recover the amount paid, which in good conscience should be paid by the one primarily responsible for the loss.  Since Scottsdale paid $1,000,000 to settle the claim against Wells, Scottsdale did not do so as a volunteer because it was obligated to do so under its policy with Wells.  Regardless of the existence of an excess insurer, a primary insurer should be held liable when it acts in bad faith in refusing to settle within its policy limits.  Therefore, the court determined that Scottsdale, as the party that actually paid the loss caused by United Fire’s bad faith, should be equitably subrogated to the rights of Wells and able to bring a bad faith refusal to settle action in the name of Wells.

The Supreme Court determined that United Fire failed to show that it was entitled to judgment as a matter of law on Wells’ bad faith refusal to settle claim.  Further, United Fire was not entitled to judgment on Scottsdale’s bad faith refusal to settle claim based on equitable subrogation since Scottsdale could properly pursue Wells’ bad faith refusal to settle claim under theories of assignment, contractual subrogation, or equitable subrogation.  Scottsdale cannot, however, the court ruled, maintain a bad faith refusal to settle claim based on a duty owed directly to Scottsdale.  Therefore, the Missouri Supreme Court reversed the trial court’s judgment and remanded the case.

This case sets forth a good discussion of the elements of a bad faith refusal to settle claim within the limits of coverage of a primary insurer. 

If you have any questions regarding this case or any other insurance law issues, please contact one of our Insurance Law attorneys at 816.931.2700.